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Friday, October 3, 2014

Sobering Up On The Future Of US Internet Gambling(iGaming)

The launch of Internet gambling(iGaming) in three US states; Nevada, New Jersey and Delaware have many individuals and groups discussing the early results of these implementations. Investors, land based casino operators, iGaming platform providers, legislatures, politicians, gaming content consumers and investors have been pondering the roll-out comparing preexisting expectations against the reality of iGaming in the USA.

The subject matter is rich with comparisons and debates referencing the European iGaming experience and US iGaming business plans that where drafted prior to the actual launch of any live iGaming businesses in the US. The salubrious and intoxicating expectations associated with US iGaming are now being tempered against what is really happening. As with any expectation jammed venture such as a new business or even a marriage, reality is always a wake-up call highlighting the delta between expectations and or the reality of a "relationship(s)".

iGaming evaluations can be somewhat confusing because certain interest groups publicly predicted expectations they knew where overly optimistic. The goal, apparently, was to prognosticate potentially overly optimistic outcomes for the purpose of gaining public support for iGaming legislation or to obtain working capital that would allow the prognosticator to enter the US market. One can argue the efficacy of this approach. However, this is a common strategy used by non-gaming related businesses promoting themselves for the purpose of raising funds or going public on an exchange.

At two ends of the spectrum we have a binary evaluation of the roll-out assessing if the roll-outs have been successful or not. The middle ground is also being explored taking into consideration the preexisting goals of various participants and interest groups and what is actually happening.

So what is the general consensus and how are each of the vested interests reacting to the reality of iGaming in the USA?

Investors - With revenues far from being close to iGaming business plan predictions and the overall roll-out across the nation being slow, it is highly likely that some investors are not pleased with what is happening. However, as previously stated, savvy investors know that the majority of initial business plans they review and approve include overly optimistic expectations. The entry into new markets is always highly speculative even if a similar business model has been introduced into a another geographic area and culture. The well healed investor has probably done some predictions of their own based on other historical introductions of regulated business ventures such as banking or investing. In addition, their motivation to invest may be more closely allied with the limited supply resulting from a regulated as opposed to "open" market. Ironically, the gaming licenses themselves may be the real value proposition for investors.

Consumers/General Public - It is not completely clear as to what the reaction of the public is to "legalized" US gambling in certain States. Yes, the numbers and revenue are lower then expected. However, is this a result of overly optimistic business models, frustration/dissatisfaction with the iGaming proposition or overly restrictive age/location scrutiny that excludes valid players. Is the heavy influence of European iGaming operators and their content causing dissatisfaction with the actual gaming content? After experiencing the initial legalized iGaming content will seasoned iGaming players return to their tried and tested "illegal" sites that many of them actually "trust" and enjoy?

State Governments/Legislatures - Certainly governments that forecasted optimistic iGaming revenues for their states are subject to criticism if those revenue models are not being achieved. However, if the objective of overly optimistic revenue predictions was a planned strategy to assure that iGaming legislature would be passed, perhaps, in a convoluted way, the first step goal was achieved and it will be a wait and see situation to determine if the actual revenue generated over time will be appreciated and used in a way that will placate the voting public. States like California planning to legalize iGaming are in a different situation. They have to take into consideration the new "normal" of iGaming proposing plans that contain more realistic predictions. How will this influence state legislatures contemplating iGaming in their States?

Federal Enactment Of iGaming - We have seen from the likes of Sheldon Adleson and Steve Wynn that certain high profile US land based casino operators are not in favor of federal or state legalization of iGaming. One can argue that their logic and reasoning for not wanting iGaming is flawed. Of course, their are equally politically powerful land based operators such as Caesars and MGM that are very active in iGaming in the US and will no doubt make their own public proclamations about their will to influence federal iGaming legislation. We will see how the congress reacts to these competing interests.

American Indian Nation - Although no native American Indian tribe(to my knowledge) has legalized iGaming within their territorial boundaries they are closely watching the events occurring in active iGaming jurisdictions. They are sovereign nations within the US and have the legal rights, similar to state governments, to launch iGaming businesses. They are also land based casino operators in many US states providing them with knowledge of "gambling" regulation and operations. Their relatively small land based consumer foot print makes their decision to operate iGaming operations more challenging as they look at the numbers in New Jersey, Nevada and Delaware. Do they move forward at this point or do they wait at the sidelines and see how the federal debate evolves or perhaps collaborate with other tribes to create higher liquidity and lower risk for any one tribe?

In conclusion, we are seeing US states launch iGaming businesses and we are gaining important insights into the economic impact of iGaming in the US. Operators, governments and consumers are becoming more familiar with the right iGaming "product" for the US and are learning more about the operational reality of US iGaming. In point of fact, the current American iGaming model is an import from the European model where Europe moved from a .com to a .co implementation. The impact, in Europe, of this change was quite sever causing a significant increase in the cost of operation and a decrease in overall revenue for operators. Some countries such as France have proven to be what one might characterize as a "failure" while other European country implementations have proven to be successful in term of "break even" financial models. Canada has also moved along with their iGaming initiative conceding control of those businesses to lottery operators in each province.

These experiences either directly or indirectly give America plenty of data to draw on to eventually come-up with an iGaming business model that works for consumers, voters and legislatures. We can all agree that there is still much to learn about the economic viability of US iGaming and how best to achieve a balance between the need to control, drive revenue, achieve profitability and please the general gaming public. The public consumers of iGaming content will be the most important group to understand because they will make the ultimate decision if iGaming succeeds in the good old USA.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin, has developed, launched and operated Internet gambling sites in Europe. Kevin and Gameinlane develop "social" casino games for third parties. Kevin has worked for and with US land based casino operators helping them evaluate social casino and iGaming platforms for the purpose of joint ventures and acquisitions. Kevin can be reached at kflood@gameinlane.com

1 comment:

Kevin - nice article. Prior to going live, some New Jersey forecasts were as high as $1.5 billion. The actual year-one revenue numbers are going to come in closer to $110 million. In addition to the overly-optimistic forecasts, other reasons for this shortfall are that technology infrastructure providers to iGaming are immature. Many credit card transactions are declined by issuing banks, even if they are now legal. Conservative geo-location technology blocks some players who are within the jurisdiction. And acquisition marketing efforts have not been as effective as hoped, as many publishers reject iGaming (and pornographic) ads. Many people in New Jersey do not even know that iGaming is legal within their state. Once technology catches up, banks cooperate, and players become more aware, revenues will increase.